Financial markets

Benny Hartwig, Christoph Meinerding, Yves S. Schüler, 19 January 2022

In the aftermath of the global financial crisis, a consensus rapidly emerged that systemic risk – a central concept in financial stability – needed to be contained going forward. However, to this day experts cannot agree on how to measure systemic risk in the first place, with researchers having proposed a plethora of indicators. This column proposes an analytical approach designed to lend structure to this universe of indicators for measuring systemic risk.

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 13 January 2022

The relationship between financial risk and economic growth is complex. This column finds that perceptions of high risk unambiguously harm growth, while perceived low risk has an initial positive impact, which eventually turns negative. Global risk has a stronger effect on growth than local risk, via its impact on capital flows, investment, and debt-issuer quality, challenging monetary policy independence.

Afonso Eça, Miguel Ferreira, Melissa Prado, Emanuele Rizzo, 09 December 2021

The rapid growth of FinTech platforms creates challenges and opportunities for financial markets. This column uses a new dataset from a Portuguese FinTech platform to study the determinants of lending demand and the consequences of FinTech loans for small and medium-sized enterprises. It finds that FinTech lending caters mainly to larger SMEs, with higher profitability and a lower credit risk. Additionally, it shows that firms increase assets, employment, and sales following an approved FinTech loan. Finally, FinTech lending allows firms to diversify their pool of lenders and reduce exposure to shocks in the banking system. 

Sudipto Dasgupta, Thanh Huynh, Ying Xia, 08 December 2021

Whether socially responsible investors have any impact on the environmental, social, and governance policies of portfolio firms has become a much-debated issue. This column shows that firms reduce emissions at their local plants following enforcement actions by the US Environmental Protection Agency against nearby plants of firms operating in the same market, and that the emissions reduction is twice as large if a nearby ‘socially responsible’ mutual fund owns shares of the parent firm of the peer plants. The threat of exit by these funds appears to have real consequences for how the local plants respond to the enforcement action.

Winta Beyene, Manthos Delis, Kathrin de Greiff, Steven Ongena, 04 December 2021

One of the concerns in the debate on climate change is whether financial flows contribute to the reduction of emissions. This column looks at the role bond market-based and bank-based debt plays in the allocation of resources to fossil fuel in the context of the risk of stranded assets. The authors show that banks continue to provide financing to fossil fuel firms that the bond market would not finance as long as they do not price the risk of stranded assets. In this setting, stranded assets risks may have shifted to large banks.

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